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Two federal district court judges will likely rule in early 2014 on pending challenges to the availability of premium tax credits under the Patient Protection and Affordable Care Act of 2010 (ACA). The plaintiffs in both cases argue that the ACA’s plain language does not permit residents of states with a federally facilitated exchange, 33 states plus Washington, D.C., to obtain such credits. The government counters that the legislative history, structure and purpose of the ACA mandates that premium tax credits be available nationwide.

Premium tax credits under the Patient Protection and Affordable Care Act of 2010 (ACA) could be unavailable to residents of states with a federally facilitated exchange (FFE), depending on the outcome of four cases pending in federal trial courts.

In the two most prominent of these federal cases, Halbig v. Sebelius in Washington, D.C. and King v. Sebelius in Virginia, the plaintiffs’ challenge to a May 2012 Internal Revenue Service (IRS) rule is based upon an apparent conflict with the “plain language” of the ACA. The IRS rule provides that effective January 1, 2014, the health insurance premium tax credit will be available to taxpayers whether they obtain coverage through a state-based exchange or an FFE.

The plaintiffs in both cases maintain that the ACA, by its very terms, does not permit tax credits to be available to taxpayers obtaining coverage through the FFE. Instead, the plaintiffs point out that section 1401(a) of the ACA (which enacted Internal Revenue Code section 36B(b)(2)(A)) provides that such tax credits are available only to taxpayers “enrolled in through an exchange established by the State under 1311 of the [ACA].” (emphasis added). Section § 1311 provides for the establishment of health benefit exchanges by states, as opposed to section 1321 of the ACA, which governs when the state fails to establish an exchange and thus the federal government must establish a fallback FFE. The plaintiffs argue Congress intended a deliberate “carrot and stick” approach to implementing exchanges under the ACA—with the carrot being that residents in states that establish an exchange can access premium tax credits and the stick being that residents in states that fail to do so will not have access to such tax credits.

In response, the federal government has vigorously defended the IRS rule by asserting that the plaintiffs’ reading of the provision is inconsistent with the legislative history, structure and purpose of the ACA. The government has argued that premium tax credits are a critical component to the ACA and were assumed to be available nationwide. The government has noted that other statutory provisions, such as the Health Care and Education Reconciliation Act of 2010 section 1004’s reporting requirement imposed on FFE and state-based exchanges, would be rendered superfluous if the plaintiffs’ argument was to prevail.

Furthermore, the government has argued that section 1321 of the ACA gives the U.S. Secretary of Health and Human Services the authority to establish and operate an exchange within a state and thus, in effect, step into the shoes of states that do not establish their own exchanges. Therefore, it would be unreasonable to conclude that the same premium tax credits would be unavailable to residents merely because they are enrolled in an FFE rather than a state-based exchange. In response to the Halbig case, the government has also questioned the appropriateness of the relief sought—nationwide cancellation of the IRS rule, as opposed to a tax refund for those affected—and asserted procedural bars relating to standing and the Anti-Injunction Act. Because the FFE will operate in 33 states (plus the District of Columbia) in 2014, the ability of residents of those states to obtain premium tax credits is likely to have a profound impact on insureds, insurers and providers.

Both Judge Friedman and Judge Spencer anticipate issuing decisions in early 2014, which will likely propel these cases to the U.S. Courts of Appeals in the District of Columbia and the Fourth Circuit, respectively, before randomly selected, three-judge panels. Either side will be able to ask for expedited hearings and, perhaps, for interim relief pending a final decision. If a split between these federal appellate courts occurs, the Supreme Court of the United States likely will be required to make the final decision.

The IRS rule is being challenged in two other federal cases as well. First, State of Oklahoma ex rel. Pruitt v. Sebelius, brought by Oklahoma Attorney General Scott Pruitt, revives an earlier challenge to the ACA and seeks declaratory and injunctive relief on behalf of individuals and employers in Oklahoma. Second, in October 2013, Indiana and 15 of its public school districts sued the IRS, challenging its use of federal tax subsidies and penalties to implement the ACA.

There is no doubt that the ACA would be seriously undermined if the courts were to rule in favor of the plaintiffs and hold that there are no federal tax credits available to those who purchase coverage on the FFE. Therefore, just as Supreme Court strove to find a way to uphold the ACA as a whole against a constitutional challenge, it would be unsurprising if the federal courts, and ultimately the highest court, accept the government’s argument that Congress intended to make these tax subsidies available to all otherwise eligible—notwithstanding the flawed statutory language to the contrary. McDermott Will & Emery will continue to monitor developments in these cases and to assess how the decisions reached by the federal courts may affect our clients.

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